Pricing Interest Rate Swaps

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Күн бұрын

In todays video we will learn the two methods for pricing interest rate swaps.
These classes are all based on the book Trading and Pricing Financial Derivatives, available on Amazon at this link. amzn.to/2WIoAL0
Check out our website www.onfinance.org/
Follow Patrick on twitter here: / patrickeboyle
Interest Rate Swap Valuation
Swaps are typically valued at zero at inception. Afterwards they, may take on a positive or negative valuation. Swaps are a zero-sum game, one counterparty’s gain is equal to the other counterparty’s loss.
A plain vanilla interest rate swap can be priced as either a combination of a long position in one bond and a short position in another bond, or as a portfolio of forward-rate-agreements. In this video we will learn about both the bond valuation approach and the FRA (Forward rate agreement) approach to pricing interest rate swaps.
Trading and Pricing Financial Derivatives

Пікірлер: 22

@davidpake9340 2 жыл бұрын

cool channel Patrick

@kaiweichu2647 3 жыл бұрын

Could you provide some insights on calculation for the Spread on floating leg when we are hedging a fixed coupon bond? For example, the current swap rate for 5Y is 0.50%, when I have a need to swap my bond with coupon of 4% to floating, how should I go about calculating the spread on my floating leg? Would it be just LiBor + 3.50%? Or is there another way to calculate that? Would be really helpful if you can provide some insights on that. Thanks!!

@mediarockit 5 ай бұрын

Hello Patrick, has the title "Trading and Pricing Financial Derrivtaves" changed to "Derrivatives for the Trading Floor"? Because the title you mentioned cannot be found. I bought both available titles, on derivatives and statistics, to brush up on statistics and finally understand derivatives. Which playlists or courses do I follow to help me get through the books?

@andarvidavohits4962 5 жыл бұрын

Subscribed. Although I've not yet seen many of your videos, I am loving the titles and the content they promise. I'm positively delighted to find a channel focused on explaining derivatives. Although I don't mind it myself, I believe the excessive 'eye contact' present in your videos might weird some people out. If you care, create a more suitable visual focus for the viewer. Best of luck.

@PBoyle 5 жыл бұрын

Thanks Andarvid. Hopefully you will find them useful.

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@Franco Jalen instablaster :)

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@Andrea-uq2db 2 жыл бұрын

how would this be if the libor was 3 month?

@kratosgodslayer6171 4 жыл бұрын

I have a query regarding pricing of a Swap, there is formula 1-dL/Sum of d. Where "d" is discounting factor for the LIBOR rates. I am not able to find what is dl, please help!!!!!

@PBoyle 4 жыл бұрын

All you have to do to price a swap is present value the two streams of cash flow. The swap is worth the present value of what you are receiving less the present value of what you are paying.

@primianoluc 2 жыл бұрын

Hi Patrick, how would you address non-linearity in swaps assuming you locked into receiving fixed 5 BPs fixed over a 2 years tenor by hedging one swap with another? As the PV of those 5 BPs would then be exposed to fluctuations in the interest rate curve, what tools would be best to hedge these future cash flows?

@user-uj6lc2ql2p Жыл бұрын

If the conventions of the two swaps are the same, you will always be flat, that is the hedge. On swap A you rec 5bps, pay that on swap B. Vice versa with the floating legs. The non linearity only occurs considering when you trade out of mid. (Which is expected) I.e. the 2 year swap has a 4bp, wide spread, so it may cost you 9bps, to pay, where you can only rec 5bps in the market. The real way to hedge swaps to be perfectly flat is by looking at DVO1, you want the two swaps to have the same DV01, I.e. you could have two completely different positions (one is 100mio, 3year, one is 100mio, 2 year, if the DVO1 is the same, you will be perfectly hedged).

@user-uj6lc2ql2p Жыл бұрын

Unless I am mistaken, and you are saying you have already hedged and now stand to rec 5bps across the 2 positions (?)- if that is the case and the swap floating (indexed) rates are the same, you would just have a positive mark-to-market of the PV of that future 5bp amount. Unsure what you mean by ‘non linearity’

@user-uj6lc2ql2p Жыл бұрын

Ah, I see your question. Simple answer would be a ‘floater’, fixed income product linked to the floating rate. So you are due to receive 5bps (let’s say that is 5million dollars of the notional), as rates increase your MTM falls, you could spend some money on a hedge by ‘depositing’ the PV of that 5mio- say 4mio today, to be extreme, and as the PV rises or falls, the Floater will move in the opposite direction.